Saturday, June 13, 2009

After being up 0.22% for the month of June last week, Jim Simons 60th world largest supercomputer lost 0.13% in the second week and is now up just 0.09% MTD, whereas, thanks to such obvious market manipulation that even German fund managers are making fun of us, the S&P is now, as Bob Pisani points every second when he is not discussing how a sideways market is victory for the bulls, at 2009 highs.

At this point it is more than obvious that at least half of Jim's 1,900 Terabytes are being used to run a porn server farm: this is the only thing that can explain the persistent underperformance and lack of eviction notices. At $20/month assuming he has a million subscribers, Jimbo is pulling a cool 20 gorillas with exactly 0 beta, month over month.
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As for the authenticity of the "Kennedy-Bonds," we still have doubts, but the U.S. government bonds (worth/in denominations of ? ) some 358 million euros seem (credible/ believable). They are made of filigree paper of excellent quality," said [Colonel Rodolfo] Mecarelli.

The bonds, with a face value of more than $134 billion, are probably forgeries, Colonel Rodolfo Mecarelli of the Guardia di Finanza in Como, Italy, said today.

What a difference... a day makes....

Apparently the Secret Service has been asked to authenticate the instruments. (Gee, that only took a week).

Tim Geithner was in Italy yesterday to chat with the Russians and the Japanese- both obviously big debt holders. Wonder why he didn't just cruise over to the border and check out the docs?

From today's mail bag:

Greetings from Milan,

This letter must come to you as a big surprise, but I believe it is only a day that people meet and become great friends and business partners. I am Mr. Shoichi Nakagawa, former Finance Minister for a Group of 7 country. I write you this proposal in good faith, believing that I can trust you with the information I am about to reveal to you.

I have an urgent and very confidential business proposition for you. In February of this year an agent of a foreign power spiked my cold medicine with opiates causing me to nod off during an important press conference. I was subsequently forced to resign in disgrace.

As my termination loomed I took the chance to retain US DOLLARS 134 BILLION in negotiable bearer bonds I found forgotten in the dusty bottom drawer of the prime minister's desk. I have since, by the grace of God, deposited these documents with trusted associates in Italy.

As I am under constant surveillance I cannot directly deposit these bonds without the help of a foreigner and that is why I am contacting you for an assistance. My associates will travel to Switzerland by train to deliver the documents to the Swiss banking organization of your choice.

If you accept to work with me, I want you to state how you wish us to share the funds in percentage, so that both parties will be satisfied. If you are interested, contact me as soon as you receive this message so we can go over the details. Thanking you in advance and may God bless you. Please, treat with utmost confidentiality.

Zero Hedge believes in disclosing the truth - sometimes it is slightly biased by the filter of interpretation but for the most part we present the facts that lead us to our conclusions, and open up the forum to intelligent debate. In this vein, and in the ongoing hope of exposing any peculiarities and potential outright illegal manipulation in the market, I present to you the June Letter by Lipper and Morningstar Rated (5 stars) German Asset Manager Galiplan Aktien Global AMI, written by fund manager Steffen Hauptmann.

I would like to draw your attention to the section titled "Der Permanente Bid - Manipulation?" The full report is presented below, and I will translate the section using Google: I believe the jist is quite clear.

The permanent bid - manipulation?

Recently, I read more comments on the nature like "The market is rising against all the technical indications" or since a few weeks almost every day of some analysts that a "technical Correction of 10-15% is healthy and inevitable. " But nothing happens. Corrections are about 2-3% not out and despite negative indicators en masse the market is rising constantly. This is indeed quite unusual, at least if you compare it to 'normal' Market behavior compares.

No wonder that there are increasing rumors that Market is manipulated. Normally I give to such conspiracy theories little. They draw most only depends on the real relationships to recognize. However, I have even in recent weeks some phenomena observed close to the Thoughts of a targeted manipulation is not quite so seem implausible lassen.

First one can observe that whenever the U.S. market over night falls (the futures will be 24 h traded) and the next day clearly negative for open threatens, just before stock market opening is a constant Bid (a collector) in the futures market and This opening up a piece raises. Especially in pre-trade is the relatively low volumes possible. This happens so regularly that already many people's attention have become.

Secondly appears whenever the market crucial points umzukippen suddenly threatens a great bid in the market oblivion. Finally, we are on 29 May and on 3 June shortly before Closing stock market view. On 29 For example, in May the market is threatened once again in the 200 -- Day abzuprallen line and down to rotate. For technical analysts this failure would be a clear Sell signal was. Since the market is already very long without any correction was gone, would be a greater downward movement was normal. But then came a few minutes before the close an unlimited orders over 5,000 S & P500 index futures in the market and catapulted them within seconds 1.5% above and on the 200-day line. The value of these orders amounted to nearly 250 million U.S. dollars!

It is hard to imagine that an institutional investor his orders so kursbeeinflussend in the market represents. Normally, one would such an order evenly distributed throughout the day and thus kursschonend in the market. On other days, similar things happened. So I ask myself, who the motivations here, and where the money comes. Only very very few institutional investors have the means, with such large orders to play. "

If there is no tampering, then there are at least unusually crazy times. Maybe I really can see ghosts, and the market is involuntarily from the institutional investors driven by the current upward movement have completely overslept. As far as I know there are very many! The stand on the sidelines and waiting for a correction to buy into the market them. You do not want in these overbought Market. But it comes and will not Correction. Maybe but then loses a or other nerve and goes "all in"? This mix of the short-acting "less negative "news, on the basis of the acting Stimuli until the autumn can pause, combined underinvestment with institutional investors is an explosive. It could lead to the market fundamentals of its decouple. We inflating a new stock and Commodity bubble experience. I already have a name to read: BGB - Bernanke-Geithner bubble. Everything well and good if these bubbles are not the property had suddenly and unexpectedly to burst.

It seems like it was just yesterday when Six Flags' PR department was assuring Zero Hedge and its readers of just how fabulous things were at the theme park better known as the juvi delinquents cigarette break hang out (and the only place in the world where you can buy small cups of Diet Coke for the Bernanke wet dream price of $9.95). Maybe if the theme park was monitoring its operations with the same mad skills as it was overseeing any potentially adverse PR, the company would not have had to file for bankruptcy (about which Zero Hedge was warning as recently as January 15)... Which it did today much to Fidelity's amusement.

Six Flags said it filed for Chapter 11 protection with the unanimous support of its lenders' steering committee.

The plan will result in a deleveraging of the company's balance sheet by about $1.8 billion, as well as the elimination of more than $300 million in preferred stock obligations.

"The current management team inherited a $2.4 billion debt load that cannot be sustained, particularly in these challenging financial markets," Mark Shapiro, the chief executive of Six Flags, said in a news release.

Great work Mark: taking a cue from the admin and placing the blame squarely on the previous management.

In addition to Dan Snyder who acquired the company in a proxy fight several years ago, other major equity wipe outs include Bill Gates and Jim Simons, whose Cascade Investments and RenTec funds, own 11.1% and 5.5% of the already worthless stock (page 5 of the Voluntary Petition below). We highly doubt this event will dent the latter's relationship with its PBs JPM and DB as they continue aspiring to new heights in purchasing every imaginable share of SPY and IWM available.

Friday, June 12, 2009

The chart below indicates the Fed's YTD open market treasury purchases. Roughly $32 billion in bonds/bills has been bought since the last update 2 weeks ago. The chart below can be traced back the Federal Reserve of New York's website here.

More notable were the Fed's open market operations around and on the days of the fateful 10 and 30 yr USTs this week. Recall, on June 10th was the abysmal $19 billion auction for 10 Yr Treasuries while June 11th saw a surprisingly strong $11 billion in 30 Years. Pulling the NY Fed's OMO data for these days yields the following results:

As the data indicate on the day of the $19 billion in 10 Yr UST, the Fed was concurrently bidding on almost $11 billion (of which $3.5 billion was accepted) of what most likely were 10 years: more than 50% of the full Treasury auction. Furthermore, the day before, the Fed purchased $7.5 billion in 3.5 - 5 years after submitting nearly $30 billion in bid requests. This is the same day that $30 billion in 3 years Treasuries were auctioned off at 1.96%. Has the Federal Reserve been keep the clearing price conveniently low by purchasing comparable trasuries on or near the days of critical auctions? Open market purchases seem to indicate that is in fact the case.

In summary - last week's bond market exhibited unprecedented volatility: spreads between USTs and agencies fluctuated drastically, prices were all over the palce, the Fed was concurrently conducting OM purchases as the Treasury was auctioning off bonds in the primary market... cats and dogs living together, etc... And keep in mind total activity this past week was under $100 billion. There is still well over $1 trillion in bonds to be autioned off this year alone. If anyone is foolish enough to predict just what will happen with the long bond, the 2s10s, T-bills, etc. by year end, please speak up.

Well, I will take one stab: the irony is that while Zero Hedge is in the near-term deflationist camp (at least in principle), the supply of bonds will likely be the technical factor that determines price levels over the next 6 months, more so than economic outlook. As such, we expect volatility to persist, and the curve, especially the long dated stuff, to widen, even as household net worth continues plummeting (or as a result of). Inflationists, will, of course, read into this as an inflationary sign and buy every barrel of oil they can find while screaming bloody inflation as CNBC reverberates it to the moon and back since it jives with exactly what the Administration is hoping: that Joe Sixpack goes out and maxes his credit card just like in the good old days. But the last is not and will not be happening... So the conundrum continues. (The only thing certain is death, taxes, and that JP Morgan will forever be gunning those pesky 5k SPY blocks.)
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The names having the largest impact on IG are International Lease Finance Corp. (-114.44bps) pushing IG 0.76bps tighter, and FirstEnergy Corp (+45bps) adding 0.35bps to IG. HVOL is more sensitive with International Lease Finance Corp. pushing it 3.37bps tighter, and XL Capital Limited contributing 1.15bps to HVOL's change today. The less volatile ExHVOL's move today is driven by both Wells Fargo & Company (-16.25bps) pushing the index 0.17bps tighter, and FirstEnergy Corp (+45bps) adding 0.45bps to ExHVOL.

The price of investment grade credit fell 0.07% to around 99.06% of par (as cash dramatically outperformed synthetics on the week driving the basis to almpst zero in IG names), while the price of high yield credits rose 1.505% to around 86.01% of par (basis not nearly as compressed). ABX market prices are lower by 0.75% of par or in absolute terms, 1.88%. Broadly speaking, CMBX market prices are lower by 0.29% of par or in absolute terms, 0.1%. Volatility (VIX) is down 1.47pts to 28.15%, with 10Y TSY rallying (yield falling) 3.6bps to 3.8% and the 2s10s curve flattened by 0.8bps, as the cost of protection on US Treasuries rose 5.28bps to 44.875bps. 2Y swap spreads tightened 7.3bps to 41.75bps, as the TED Spread widened by 0.4bps to 0.46% and Libor-OIS deteriorated 2.6bps to 41.3bps.

The Dollar weakened with DXY falling 0.64% to 80.157, Oil rising $3.76 to $72.2 (outperforming the dollar as the value of Oil (rebased to the value of gold) rose by 7.29% today (a 4.85% rise in the relative (dollar adjusted) value of a barrel of oil), and Gold dropping $15.95 to $939.3 as the S&P rallies (944.7 0.45%) outperforming IG credits (122.09bps -0.07%) while IG, which opened tighter at 126.5bps, underperforms HY credits. IG11 and XOver11 are +3.09bps and +18.05bps respectively while ITRX11 is +6.1bps to 107.85bps.

The majority of credit curves steepened as the vol term structure flattened with VIX/VIXV rising implying a more bullish/less volatile short-term outlook (normally indicative of short-term spread compression expectations).

Dispersion fell -6.2bps in IG. Broad market dispersion is a little greater than historically expected given current spread levels, indicating more general discrimination among credits than on average over the past year, and dispersion decreasing more than expected today indicating a less systemic and more idiosyncratic narrowing of the distribution of spreads.

50% of IG credits are shifting by more than 3bps and 39% of the CDX universe are also shifting significantly (less than the 5 day average of 46%). The number of names wider than the index decreased by 3 to 43 as the week's range fell to 12bps (one-month average 22bps), between low bid at 117.5 and high offer at 129.5 and higher beta credits (-1.45%) outperformed lower beta credits (-1.29%).

In IG, wideners were outpaced by tighteners by around 2-to-1, with only 41 credits notably wider on the week. By sector, CONS saw 22% names wider, ENRGs 25% names wider, FINLs 33% names wider, INDUs 43% names wider, and TMTs 43% names wider. Focusing on non-financials, Europe (ITRX Main exFINLS) underperformed US (IG12 exFINLs) with the former trading at 107.88bps and the latter at 105.14bps.

Cross Market, we are seeing the HY-XOver spread compressing to 229.31bps from 298.57bps, and remains below the short-term average of 274.3bps, with the HY/XOver ratio falling to 1.34x, below its 5-day mean of 1.4x. The IG-Main spread compressed to 14.24bps from 18.38bps, and remains below the short-term average of 17.47bps, with the IG/Main ratio falling to 1.13x, below its 5-day mean of 1.16x.

In the US, non-financials underperformed financials as IG ExFINLs are tighter by 0.7bps to 105.1bps, with 60 of the 104 names tighter. while among US Financials, the CDR Counterparty Risk Index fell 3.89bps to 143.17bps, with Banks (worst) tighter by 8.04bps to 182.4bps, Brokers (best) tighter by 10.63bps to 168.33bps, and Finance names tighter by 29.9bps to 643.08bps. Monolines are trading tighter on average by -172.33bps (8.13%) to 2292.03bps.

In IG, FINLs outperformed non-FINLs (3.03% tighter to 0.68% tighter respectively), with the former (IG FINLs) tighter by 9.2bps to 292.9bps, with 14 of the 21 names tighter. The IG CDS market (as per CDX) is 26.3bps cheap (we'd expect LQD to underperform TLH) to the LQD-TLH-implied valuation of investment grade credit (95.95bps), with the bond ETFs outperforming the IG CDS market by around 5.01bps.

In Europe, ITRX Main ex-FINLs (outperforming FINLs) widened 6.51bps to 107.88bps (with ITRX FINLs -trading sideways- weaker by 4.48 to 107.75bps) and is currently trading at the wides of the week's range at 100%, between 107.88 to 101.37bps, and is trading sideways. Main LoVOL (sideways trading) is currently trading at the wides of the week's range at 100.02%, between 72.31 to 66.37bps. ExHVOL outperformed LoVOL as the differential compressed to -0.65bps from 4.22bps, but remains below the short-term average of 4.31bps. The Main exFINLS to IG ExHVOL differential decompressed to 36.22bps from 30.78bps, and remains above the short-term average of 32.08bps.

It was fun while it lasted. I am of course referring to the mirage that was the Administration's promise of "very manageable" tax increases. Bloomberg is reporting that as part of the Healthcare overhaul bill, there will be an addition $600 billion in tax increases.

Democrats in the House and Senate are working on legislation that would require all Americans to have health insurance, prohibit insurers from refusing to cover pre-existing conditions and place other restrictions on the industry.

Democrats will work on the bill’s details next week as they struggle through “what kind of heartburn” it will cause to agree on how to pay for revamping the health-care system, Rangel, a New York Democrat, said today. He also said the measure’s cost will reach beyond the $634 billion President Barack Obama proposed in his budget request to Congress as a down payment for the policy changes.

Asked whether the cost of a health-care overhaul would be more than $1 trillion, Rangel said, “the answer is yes.”

Why raise taxes? Can't the Treasury just print a cool quadrillion (in bearer bonds, to be unsuccessfully smuggled by vicious ninjas into Bern so that UBS can pretend to be buying up long-dated maturities for its own account) and that will be that. Timmy has already stocked up on enough paper to run the printers at turbo for a good 4 years (and even accounted for the occassional PC Load Letter error) and Ben has bought every single available Port-A-Potty (Citi, BofA, Regions Financial) in which to flush all the little green pieces of paper that he buys from Timmy.

Additionally as Obama has pretty much staked his political career on only raising the taxes of those who make over $250,000 per year. That's what - 4, maybe 5 million Americans? So, $600 billion divided by 5 million, that makes... oh, about $120,000 in tax increases per person.

Silver lining - a definite stock recommendation: buy the airlines (preferrably in the next five minutes before Goldman runs oil to over $100 and Delta files for Chapter 44 or whatever iterration of the bankruptcy process they are at now) as sales for one way tickets out of the US skyrocket.
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As a follow-up to today's issue with Matching Engine One, we have found that market oddlot orders and oddlot portions of partial roundlot orders (PRLs) are not executing in the affected symbols (listed below). However, oddlot orders and PRLs with limit prices are executing properly in these symbols. For the remainder of the day, customers should cancel unexecuted market oddlot orders and the oddlot portions of partial roundlot orders in the affected symbols, and submit only oddlot orders and PRLs with limit prices.

Nevermind the negative market breadth. Nevermind that there is absolutely no liquidity in the market. An election result in Iran is sufficient for programs to rape TICK (peak at almost 1,500? Come on - make it believable at least) and for JPM to gun the SPY for a little Friday ETF love: as if an excuse is really needed. (And now it seems both parties are saying they won. brilliant)

Maybe the administration will finally listen when one of their own potential bailout beneficiaries tells them the sad truth about the inevitable CRE implosion. Surprisingly, a very good summary of the CRE debacle straight out of CBRE Partners (with $36 Billion AUM, it is just 3x larger than Cohen And Steers). Speaking of... Where are those CMBS downgrades S&P: getting some phone calls from the administration lately? Oh wait - looks like there is a backstop, and it is called Realpoint - in case you guys dont play ball it seems you will simply be taken out of the picture: after all just two AAA ratings are required, and looks like Realpoint is about to sell their soul to the devil. (Please say it ain't true Realpoint). From the Reuters article:

S&P shocked the the CMBS market last week by advising that its new models, if adopted, would likely prompt ratings cuts on 95 percent of top bonds issued during the peak of the real estate cycle in 2007 and 85 percent of CMBS from 2006. S&P is mulling responses from a formal request for comment.

Some 50 insurers have contacted Horsham, Pennsylvania-based Realpoint over the last few days, saying, "you guys need to get approved" by the NAIC, Dobilas said.

"Realpoint acts as a trump card to any action that S&P takes," he said. "We don't perceive any problem" getting approved by the NAIC, he added.

The NAIC, which represents all of U.S. state and territory insurance regulators, affirmed that Realpoint's application has been received by NAIC's Securities and Valuations Office.

Anyway, from the CBRE piece:

This has NOT been a liquidity crisis, but a crisis of bad credit

The system of human incentives and checks and balances was poorly thought out across the board: securitizers, banks, rating agencies, bond buyers, real estate investors

There was too much liquidity in the system, which led to rising prices, which led to relaxed underwriting standards

Ah, the tech trade: nothing better than buying based on technicals, playing hot potato and ignoring the fundamentals. And when the fundamentals indicate that yet another major chip maker, this time MagnaChip has filed for bankruptcy, why bother. Executives for the former spinoff of Hynix, 2006/7 distressed debt darling, and CVC and Francisco partners portfolio company, were seen entering Bankruptcy court in Delaware not surprisingly without the idiotic grin of all those pundits on CNBC who keep pushing hyper-overvalued tech companies (but the new iPhone is out - what gives?). From the press release:

The company's sales units in Europe, Taiwan and Japan are not part of the Chapter 11 filing, according to reports. MagnaChip has assets up to $50 million, but it also estimated liabilities of more than $1 billion.

At the same time, a fund led by South Korea's KTB Securities Co. Ltd. has acquired MagnaChip and its affiliates, according to court documents. The deal is valued at about $80 million.

In 2004, the non-memory chip unit of Hynix was sold to a newly-created South Korean company formed by Citigroup Venture Capital Equity Partners L.P., CVC Asia Pacific Ltd. and Francisco Partners.

The new company, MagnaChip, inherited three main business lines from Hynix, including CMOS image sensors, LCD drivers and foundry services. In 2005, MagnaChip's sales were $937.7 million, a 13.6 percent decrease over 2004. It also showed a loss of $100.9 million in 2005.

Looks like being stuck with a foundry that only allowed 1 megapixel cell phone CMOS and several hundred turns of leverage was not the recipe for success that CVC thought it was. Oh well - here is hoping that KTB knows how to run the business now that it has been stripped of all that bad, bad debt.

Other chip makers that recently went the way of the dodo include Qimonda AG and Spansion Inc., both of which Zero Hedge has written about in the past. Anyway, this will only reinvigorate the short squeeze for tall the other fab companies, so it is likley very prudent to throw all your money in a company that directly competes with any of the abovementioned three as the ensuing price war will likely have a tremendously (good/bad - pick one, the market doesn't care) impact on the stock you invest it.
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Been a while since we heard from the most popular (and profitable) research (and trading) desk on Wall Street. Last night Merrill analyst Craig Schmidt went to town upgrading pretty much anything he could get his hands on. To wit, all from the last 24 hours:

Simon Property: "We are moving from Neutral to Buy on Simon given the company’s opportunity to boost external growth (and improve SPG’s core U.S. portfolio) as they prepare to become a major player in the emerging “M&A” market in U.S. retail real estate. We are modeling acquisitions of $1 billion in ’10 at an 8.5% cap rates. These new assumptions take our ’10 estimate from $5.75 to $5.95."

Federal Realty: "Quality premium justifies Neutral rating. We are upgrading Federal Realty from Underperform to Neutral due to the fact the stock’s premium relative to its peers (on a price-to-FFO multiple basis) has contracted from 42% to 26% during the beta rally. [TD: upgrade on underperformance vs peers based on beta, not on fundamentals... fucking brilliant].

Developers Diversified: "Maintain Neutral, raising price objective. We are raising our DDR PO from $3.50 to $5.00 based on a higher forward NAV (from $3.76 to $4.84), and a modest reduction in our price objective’s discount to that forward NAV (was 5% is now 0%). We are also raising our ’10 FFO per share estimate from $1.44 to $1.59, to reflect the reduction in dilution given the issuance of fewer shares at the stock’s current price. [Give it 2 weeks until ML does another follow on here].

Taubman Centers: "Maintain Neutral, raising price objective [take DDR template, change name of company, recycle everything else]. We believe that Taubman is positioned with a solid balance sheet and has better than average liquidity than many of its retail REIT peers."

Likely much more coming over the next week as economic fundamentals and beta underperformance over the past 2 months has drastically changed the prospects for REITs.

All in all, a nice preamble for SPG to raise yet another round (2nf, 3rd, 9th - I have lost track at this point) of equity, compliments of the ever gregarious with other people's money Merrill Lynch sales/trading desk.
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Yet another indication that regulations that pertain to you and me, don't necessarily pertain to some others.

In the prospectus filed on May 19, 2009 for Regions Financial Corporation which solicited an offer to exchange 6.625% TRUPS into 138 million shares of common, dealer managers were everyone's favorite TARP recipients Goldman Sachs and JP Morgan.

Presumably, the language on the front cover should be valid at least until the expiration of the exchange offer which is June 17, 2009. The key section is the following:

None of us, the trustee, the Dealer Managers, the Exchange Agent, the Information Agent (each as defined herein) nor any other person makes any recommendation as to whether you should tender your shares of Trust Preferred Securities. You must make your own decision after reading this document and the documents incorporated by reference herein and consulting with your advisors.

So, maybe Goldman Sachs can clarify just which exemption it was using yesterday to issue an Upgrade of Regions Financial to a Buy, when the company should be in an implicit quiet period pending the duration of the exchange offer. Not surprisingly the stock screamed 12% higher yesterday on over 9% of the float turning over. While clarifying, can Goldman also please vouch that it's prop desk had no exposure to RF stock. Because if it did, that would really take the Larry Summers prize for stock manipulation moment of the year.

Developing story: Among the affected stocks are GE, Merck and Exxon - the reason cited for the halt is "connectivity issues." Did all the Supplemental Liquidity Providers leave for the Hamptons to riverboat blond Latvian exports early today? Or did GS - Sigma Server X1 get a Norton AV uncaught Trojan? That explains why all trades are now automatically rerouted to adultfriendfinder.com (for all who read into the last statement as have anything more than 0% seriousness, may God have mercy on your souls).

Inventories at U.S. businesses fell in April for an eighth straight month, the longest stretch since 2002, as companies cut back in the face of slowing sales.

The 1.1 percent decline in stockpiles followed a revised 1.3 percent drop in March that was larger than previously estimated, the Commerce Department said today in Washington. Sales decreased 0.3 percent.

Companies are limiting production and spending to draw down stockpiles that piled up last year when demand plunged. A record inventory reduction in the first quarter was among the largest drags on the economy and may set the stage for stabilization and a return to growth later this year.

The last point is debatable especially with the GM and Chrysler bankruptcy, which are sure to lead to substantial new excess capacity in the system, and need for much less restocking and capex. Here is how the green shoot is planted in the same Bloomberg piece:

Government infrastructure projects, smaller stockpile reductions and stabilization in residential construction will help the economy start growing in the second half of this year.

Fiscal stimulus and business investment will lead the U.S. recovery, General Electric Co. Chief Executive Officer Jeffrey Immelt said June 9. The coming recovery will not be as strong as the one following the last severe recession in 1982, he said.

One could beg to differ with the CEO of CNBC's parent. A casual glance at the chart below indicates that in prior periods, the hit to inventories is in fact a multiple to that of sales underperformance. This is especially true since a vast portion of the leverage used in the past decade to finance expansion and inventory buildouts has now been lost for ever. If the chart below has any predictive power, it is only a matter of time before GDP expansion pundits, and those calling for an end to the recession as soon as September, are left scratching their heads how to invert their bullish thesis and not seem like book-talking propagandists.

Using the Fed's Flow of Funds (Z.1) report allows readers to calculate overall corporate leverage: a quick and dirty proxy for a top down leverage analysis. Much in the same way that corporate leverage is derived, the Z.1 provides the data needed to calculate the ratio of net debt to LTM internal funds/adjusted after-tax profits. This is a holistic number that does not stratify based on credit quality so IG and HY get commingled in this calculation (thus keeping it simplified and allowing historical apples to apples comparisons).

Q1 corporate leverage was 1.34x, unchanged from Q4 2008, a level higher than at any point over the past quarter of a century. Comparable prior peaks have lead the HY default rate by on average 9 months in 90-91 and 01-02, implying an expected peak of corporate defaults in early 2010. What is a bigger threat is that once all the external benefits from assistance and stimulus programs wears off, the "peak" could end up being merely a blip in an accelerating upward trajectory. As Bank Of America points out: "we remain concerned that we can be witnessing a temporary stabilization in this ratio, similar to the highlighted 1989 episode, which can then take us to the second leg of deterioration to new highs. In this case default cycle is likely to be pushed well into the future, with an uncertain peak levels. Performance of this ratio over the next few quarters would be crucial in answering this question."

Zero Hedge has always been fascinated by the behemoths of securities lending (or not so much lately) State Street and Bank Of New York: these firms, which allegedly had just marginal toxic exposure, were in the front lines for the TARP bailout and have traditionally been handled with velvet gloves by the administration. In fact, many would say the custodian firms are in a league of importance much higher than even Goldman or JP Morgan as with their repo activity, security lending and cash collateral reinvestment, they are the de facto center of the shadow banking system.

A Cliff notes version of the stock lenders' Modus Operandi, sent in compliments of a reader:

In the securities lending arb, stocks and bonds are lent out by custodians and investment managers. The loan is collateralized by the borrower with cash, the lender promises the borrower a return on that cash and then invests the cash in repo and short-term debt at a spread to that promised rate of return. The sec lending market is in the trillions. This market is basically rolling overnight repo right now as it tries to dig itself out of the MTM/liquidity hole.

Many of the Fed/Treasury balance sheet efforts have been basically attempts to supplant securities lenders. Sec lending funds were the biggest buyers of 1-3yr FRNs (hence, TLGP). Lenders were also the biggest buyers of AAA cards and autos (read TALF 1.0). They were the second-biggest buyers of ABCP after 2a7 funds (ergo AMLF). Indirectly they were the largest funder of LT2 bank debt (via SIVs MTNs). They're large repo counerparties, and did everything from short-dated CDS to liquidity put options on Canadian levered super-senior CDOs.

Many stock lending funds, which have similar accrual accounting regimes to '40 Act money-market funds, have broken the buck but are still trading at $1. for example see the section beginning "We may be exposed to customer claims" on p.11. What does this mean? Not only are certain securities lending providers opening themselves up to significant litigation risk but, importantly, clients in stocks can't reallocate to bonds (or vice-versa), since the sec lending funds aren't letting them out (except in-kind). Finally, of course, as long as sec lenders remain hurt but unsupplanted, they stay short duration, which extracts hundreds of billions of $$ in term financing capacity out of the market. Fed won't act as a lender of last resort since they're still smarting from the AIG sec lending bail-out they didn't see coming.

It is no surprise that in order to incite a return to pre-Lehman economic levels (the administration's #1 goal bar none), not only the stock market would have to much higher from its March lows (a task largely accomplished through market increases on disappearing breadth, liquidity extraction by the likes of Goldman Sachs, and assorted last minute inexplicalbe ramp ups in the various futures and ETF markets), but also the shadow system would have to be back with a vengeance. And while new mechanisms to achieve this such as securitization replacement alphabet soups have yet to prove their efficacy, the real heart of the shadow banking system Frankenstein is and has always been the repo market.

Which is why we were greatly troubled when we learned recently on good authority that Federal representatives may have opened multiple undisclosed-type accounts with none other than State Street Global Advisors over the past few months. All of these accounts are allegedly handled by one single trader, who is cocooned and isolated from interaction with other partners.

Zero Hedge can, as of yet, not vouch for this being 100% factual and is asking readers who may have additional knowledge of the situtation to please come forward and share their views (tips@zerohedge.com). If, indeed, the Federal Reserve or other derivatives of the administration, are now directly involved in trading, managing repo terms, stock lending, collateral distribution and other liquidity-crucial aspects of what was once an efficient market, then indeed this rally could be written off not merely as the biggest short covering rally of all time, but one that has been explicitly orchestrated by those who should be most impartial to an efficiently working market.

We are happy to announce that the HR 1207 "Audit The Fed" Bill is now one large step closer to reality, having garnered the necessary 218 co-sponsors to ensure passage. It has, in fact, 222 co-sponsors as of today and more are appearing by the hour. Please click here for the official press release.

Many thanks to all readers who directly and indirectly helped: as recently as a month ago people said this initiative was a waste of time. This is indeed a big victory for the grass roots freedom and transparency movement. Next up: seeing the bill through a committee process and getting it to the House floor for a vote, culminating in a transparent and auditable Federal Reserve.

Not exactly what was seized by the look of the Italian photographs, but it is rare to see high-denomination bearer bonds so we thought we'd attach one.

This highlights something interesting. None of the coupons in the seized bonds appear to be missing. Since they can't be any younger than 1982, that says something about who has been holding these. Or it says something about their (lack of) authenticity.
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The United States has not issued bearer securities since 1982, completing a process started in 1966. $7.5 million in Treasury securities were "mislaid" by one of the Federal Reserve banks in 1962, which started the move to book entry.

According to the Treasury, less than 1% of "Marketable Treasury securities" exist in bearer form. $134 billion is an interesting number suddenly- unless there is some nuance to "Marketable" here.

Assuming for a moment that the bonds are legitimate, the timing is interesting in the face of deteriorating confidence in U.S. Debt. What would two Japanese (appearing) men be doing with such a large sum? Several days later the Japanese consulate is still unable to confirm they are even Japanese nationals. That's odd.

If a theft, it would certainly be the largest on record ever. And in such amounts, it seems clear that only government connivance would make such an "operation" possible. Quietly unloading Treasuries in Switzerland? Or establishing a cash pile abroad for a bit of extraterritorial QE? Buying Treasuries with credit established with a bunch of long off the books Treasuries? That's pretty recursive. I like it.

Spreads were mixed in the US with IG worse (seeming to set a 120ish support level), HVOL improving, ExHVOL weaker, XO stronger, and HY rallying (seemed like traders followed intrinsics - selling IG and buying HY as IG is rich and HY cheap to intrinsics). Indices typically underperformed single-names with skews mostly narrower as IG underperformed but narrowed the skew, HVOL underperformed but narrowed the skew, ExHVOL's skew widened as it underperformed, XO underperformed but compressed the skew, and HY outperformed but narrowed the skew (and after an outside day yesterday, both IG and HY had inside days - wider tights and tighter wides - tending to signal more volatility to come).

The names having the largest impact on IG are CIT Group Inc (-36.24bps) pushing IG 0.21bps tighter, and Weyerhaeuser Co (+5bps) adding 0.04bps to IG. HVOL is more sensitive with CIT Group Inc pushing it 0.94bps tighter, and Motorola Inc. contributing 0.14bps to HVOL's change today. The less volatile ExHVOL's move today is driven by both FirstEnergy Corp (-16.25bps) pushing the index 0.16bps tighter, and Weyerhaeuser Co (+5bps) adding 0.05bps to ExHVOL.

The price of investment grade credit fell 0.08% to around 98.87% of par, while the price of high yield credits rose 0.37% to around 84.75% of par. ABX market prices are lower by 0.04% of par or in absolute terms, 0.82%. Broadly speaking, CMBX market prices are higher (improving) by 0.01% of par or in absolute terms, 0.02%. Volatility (VIX) is down -0.35pts to 28.11%, with 10Y TSY rallying (yield falling) 9.2bps to 3.86% and the 2s10s curve flattened by 6bps, as the cost of protection on US Treasuries fell 0.07bps to 44.035bps. 2Y swap spreads tightened 1.2bps to 46.25bps, as the TED Spread tightened by 0.7bps to 0.46% and Libor-OIS improved 0.4bps to 40.9bps.

The Dollar weakened with DXY falling 1.02% to 79.51, Oil rising $1.07 to $72.4 (outperforming the dollar as the value of Oil (rebased to the value of gold) rose by 1.51% today (a 0.48% rise in the relative (dollar adjusted) value of a barrel of oil), and Gold dropping $0.07 to $954.42 as the S&P rallies (942.1 0.17%) outperforming IG credits (126.88bps -0.08%) while IG, which opened wider at 125.25bps, underperforms HY credits. IG11 and XOver11 are +1.75bps and +5.85bps respectively while ITRX11 is +2.32bps to 107.57bps.

The majority of credit curves steepened as the vol term structure flattened with VIX/VIXV rising implying a more bullish/less volatile short-term outlook (normally indicative of short-term spread compression expectations).

Dispersion fell -3.2bps in IG. Broad market dispersion is a little greater than historically expected given current spread levels, indicating more general discrimination among credits than on average over the past year, and dispersion increasing more than expected today indicating a less systemic and more idiosyncratic spread widening/tightening at the tails.

Only 24% of IG credits are shifting by more than 3bps (this is very low!) and 41% of the CDX universe are also shifting significantly (less than the 5 day average of 48%). The number of names wider than the index stayed at 41 as the day's range fell to 8.5bps (one-week average 8.73bps), between low bid at 120.25 and high offer at 128.75 and higher beta credits (-0.92%) outperformed lower beta credits (-0.82%).

Cross Market, we are seeing the HY-XOver spread compressing to 273.28bps from 292bps, and remains below the short-term average of 289.17bps, with the HY/XOver ratio falling to 1.4x, below its 5-day mean of 1.43x. The IG-Main spread compressed to 19.31bps from 19.75bps, but remains above the short-term average of 17.66bps, with the IG/Main ratio falling to 1.18x, above its 5-day mean of 1.17x.

In the US, non-financials underperformed financials as IG ExFINLs are tighter by 0.6bps to 104.6bps, with 54 of the 104 names tighter. while among US Financials, the CDR Counterparty Risk Index rose 1.07bps to 142.44bps, with Brokers (worst) tighter by 1.25bps to 169.58bps, Finance names (best) tighter by 18.79bps to 635.23bps, and Banks tighter by 2.64bps to 181.97bps. Monolines are trading wider on average by 13.52bps (0.2%) to 2341.07bps.

In IG, FINLs outperformed non-FINLs (1.95% tighter to 0.54% tighter respectively), with the former (IG FINLs) tighter by 5.7bps to 289.7bps, with 16 of the 21 names tighter. The IG CDS market (as per CDX) is 30.9bps cheap (we'd expect LQD to underperform TLH) to the LQD-TLH-implied valuation of investment grade credit (95.95bps), with the bond ETFs underperforming the IG CDS market by around 0.97bps.

In Europe, ITRX Main ex-FINLs (outperforming FINLs) widened 2.1bps to 107.6bps (with ITRX FINLs -trading sideways- weaker by 3.2 to 107.45bps) and is currently trading at the wides of the week's range at 96.74%, between 107.81 to 101.37bps, and is trending wider. Main LoVOL (sideways trading) is currently trading at the wides of the week's range at 99.99%, between 71.04 to 66.37bps. ExHVOL underperformed LoVOL as the differential decompressed to 6.5bps from 5.93bps, but remains above the short-term average of 4.73bps. The Main exFINLS to IG ExHVOL differential compressed to 30.06bps from 31.03bps, but remains below the short-term average of 31.76bps.

The haul taken from a pair of Japanese nationals trying to pass into Switzerland at Chiasso. Given that local law provides for a forfeiture of up to 40% of the value of the undeclared instruments, if these are genuine the fine could reach $53 billion. Pago per la mia parte.

For all the talk of money on the sidelines and other such gibberish, sentimentrader has put together a great chart based on Rydex fund data, indicating that traders had placed 2.4 times as much leveraged money in bull funds as bear funds: the highest level since November 2001. The data is comparable for the unleveraged ratio. If anyone still thinks that there are many bulls on the sidelines who have not entered the market, you can a) note the facts below or b) listen to Bob Pisani distort them.

Latest NYSE Program Trading data out. After a major ramp up the week before, total program trading dropped again to 28.3% of total NYSE volume, but still higher than the 52 week average. The 15 most active member firms traded 1.8 billion shares for principal accounts, compared to 1.9 in the prior week. The top principal trader as always is Goldman Sachs, with 795.7 million shares, higher than the 741.7 million from last week.

So between Goldman controlling NYSE single-name program trading and dark pools, and JPM dominating ETFs (and prime brokering trades based on the decision of 1 gazillion teraflop processor cycles), we get a market that looks set to rehearse for the most recent Saw sequel. If anyone (whose name doesn't have 80x86 in it) is still left trading this you have our sincerest condolences.

The credit market is worse for the day at 124.5/126, +0.5bps wider, while equities are stuck doing their own thing as always. (although seems today 3.30 was the sell program activation moment for a change).

In the meantime someone is punishing the TICK, with a concerted effort to buy everything to prevent the drop.

Today's RH Donnelley CDS auction closed at an abysmal 4.875 final price (on top of the IMM). When will DTCC/JPM change the default recovery on bonds for the CDSW calc from 40 to 10? Why 10% - because, as the chart below demonstrates, that is what the weighted average CDS auction recovery has been for the past 8 months. Granted it is weighted a little low due to Lehman's significant weight in determining this outcome, but even excluding Lehman, the average recovery is still grossly atrocious (not sure if that is an ISDA-accepted technical term). Hopefully all hedge funds, foaming in the mouth for high yield bonds as the hot potato game shifts from equities to HY, soon realize that it is safe to say that within 2 years this is exactly the kind of recoveries they will be looking at (and at best 3-4 coupon payments). Maybe take advantage of those greater fools while they are still willing to pay par-plus for 10x leverage monstrosities.

Ever since the 30 year auction closed earlier, the market has been acting about as rationally as the Stalingrad Bourse back in 1939. Nowhere can this be seen better than the volatility in the 15 Year mortgage. Vol has moved from stocks, to CDS, to treasuries and is now roosting in mortgages. Rinse. Repeat?

An even more vivid representation is the spread between the 30 year mortgage and the 10 year UST. Holding our breath for the SEC to release the 8-K saying this is normal and expected market gyrations.

WSJ reporting that Judge Drain in charge of the GM bankruptcy case has ordered Delphi to hold an auction and allow bids to challenge the government-brokered sale to Platinum Equity. Drain's comment with regard to Tom Gores' henchmen is priceless: "What's so special about Platinum?" They're just guys in suits. Why can't the other guys in suits just pay more?"

The Delphi case is the latest in an escalating debate over the Obama administration's attitude toward creditors' rights in bankruptcy court. The federal government has been criticized in both the Chrysler and General Motors Corp. bankruptcies for subverting bankruptcy law, harming senior lenders in order to complete a transaction.

"The rule of law and commercial rights of lenders cannot bend in the face of political forces," said Marc Abrams, a lawyer for a group of the hedge funds, in a standing-room-only courtroom in lower Manhattan Wednesday before Judge Robert Drain.

Virtually all of the remainder of Delphi's assets -- including its Troy, Mich., headquarters -- was to be sold to Platinum Equity, a Beverly Hills, Calif.-based private-equity firm specializing in distressed companies. Platinum is putting in $250 million of equity and $250 million in financing to fund the deal, with more than $2.5 billion of equity and debt being provided by GM. A GM lawyer at the hearing Wednesday estimated the auto maker's total Delphi contribution at $4 billion.

The lenders argued that Platinum was a puppet of the government and GM, which needs Delphi to emerge from bankruptcy for its GM bailout to succeed. Platinum "is an entity funded principally by GM (and thus controlled by the Auto Task Force) in which GM's and the Auto Task Force's hand-picked private-equity buyout partner Platinum provides the appearance of an independent third-party in exchange for disproportionate economic returns," wrote lawyers for a group of lenders in court papers.

Great, more people talking, some posturing here and there and nothing really changing. Rattner will just make a call to Tom, a few side calls to any potential Delphi bidders, and Platinum will end up getting Delphi with a $1 overbid and still "purchase" the company at 10% equity-to-capitalization with the taxpayers footing all the risk and Platinum getting all the upside. The cronyism will likely never change.
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